Black Coffee: Welcome to the Financial Fun House

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.

Let’s get right to it this week …

“There is no public tooth fairy. Father Christmas does not work on the Treasury staff. You can never bail someone out of trouble without putting someone else into trouble.”

— Arthur Laffer

Credits and Debits

Credit: According to Dave Kranzler, America’s pension crisis is about to detonate. A pension fund buddy of his says aggregate public pension underfunding is at least $8 trillion — despite the stock and bond markets at all-time highs. That prompted Kranzler to ask, “How in the hell is that possible?” Yes, it was a rhetorical question; there are no free lunches — no matter what pension prestidigitators tell you.

Credit: Did you see this? US households saw their net worth rise to nearly seven times their disposable personal income in 2017; that’s the highest level ever. Americans can thank soaring home and stock prices for much of those gains.

Debit: Of course, both the housing and stock markets are in bubble territory. And if you’re doubting that, here’s yet another indicator why shares are overpriced: Between 2009 and 2016, S&P500 companies saw their sales grow less than 50% cumulatively — but their share prices tripled. Magic? No. A better explanation may be rampant corporate stock buybacks … made possible by the Fed’s zero-interest rate policy.

Credit: Bonds are in a bubble too; some might say the mother of all bubbles. This week Jim Grant warned that bond markets worldwide are living in their own hall of mirrors. As just one example of the absurd distortion, Grant offers up Italian junk bonds, which are currently trading at yields below 1%. Clearly, the bond markets can no longer accurately price risk. But I’m sure it’s probably not important.

Debit: Regarding those crypto ICOs, Simon Black notes that, “Despite the many warning signs, companies have still raised $9 billion to date through ICOs. And a lot of that money has simply disappeared.” In fact, of the 902 ICOs that were launched last year, 142 failed at the funding stage, and 276 more failed after the fact — which means 46% of all ICOs failed in the last year alone. Frankly, casinos offer better odds.

Credit: As the always-insightful Franklin Sanders deftly pointed out this week, “The SEC sneered and jeered at bitcoin, warning that ‘unregulated exchanges pose significant risks to investors.’ But what about all those megabanks who have been fined for fixing regulated markets? Probably has never occurred to the regulator that one reason for buying bitcoin is to get away from the regulators.” Well said, sir.

Debit: Then again, most Americans don’t have cash to invest in those cryptos, stocks, bonds and real estate markets anyway — whether they’re regulated or not. In fact, 42% of Americans are at risk of retiring broke, with nearly half of them having less than $10,000 set aside for their so-called “golden years.” On the bright side, those same Americans’ net worth is supposedly at an all-time high … so there’s that.

Debit: The top reason most people cited for not stashing more away was because they didn’t earn enough to save, followed by the fact that they were already struggling to pay bills. A reasonable person would wonder how so many people could be in such dire straits in an economy with a puny 4.1% unemployment rate. After all, such a “tight” labor market should result in soaring wages. But, hey … what do I know?

Debit: Obviously, Americans aren’t the only ones struggling to pay their bills — their government is too. Or at least it would be if it wasn’t able to print fiat currency out of thin air. Between the federal debt and unfunded liabilities, the US is $70 trillion in the hole. I know. But if only America was blessed with record tax revenue, and booming stock and real estate markets, then its debt wouldn’t be so large. Oh, wait …

Credit: Yes, America’s ability to paper over its debts with printed cash is convenient. But as Bill Holter notes: “If monetizing one’s debt was the road to financial nirvana, then there would be no recessions, no wars, no poverty, nothing even concerning. Outright monetization has been tried thousands of times in the past. It never worked and always ended in disaster.” Amen, Bill. The piper will be paid. Eventually.

By the Numbers

President Trump has announced a 25% tariff on imported steel, sending shock waves through markets. Here’s a look at some numbers behind the global steel industry:

1,700,000,000 Tons of steel the world produced last year.

50 Percentage of the world’s steel that is used for buildings and infrastructure.

More than 1300 people responded to last week’s question and I’m happy to report that only 6% of Len Penzo dot Com readers have been audited by the tax man. That is actually much higher than average, as the IRS only audits slightly fewer than 1% of all filers.

Programming Note

Due to the ineptitude of yours truly, I inadvertently truncated a portion of RD Blakeslee’s “Grandfather Says” article this week. I fixed it about 8 hours after it was originally posted on Thursday morning, but there were several hundred of you who clicked on it before then — so I strongly encourage those of you who read it on Thursday to go back and check out the post as it was intended to be published. My apologies, Dave!

Other Useless News

Here are the top — and bottom — five states in terms of the average number of pages viewed per visit here at Len Penzo dot Com over the past 30 days:

Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com

” According to Dave Kranzler, Americas pension crisis is about to detonate. A pension fund buddy of his says aggregate public pension underfunding is at least $8 trillion ”

From the Wall Street Journal op ed “Review and Outlook”, October 15, 1975:

(Looking at an Arthur Anderson) “balance sheet on an accrual basis for the Federal Government for the year 1973” An unfunded liability of 115 billion dollars for Federal pensions (social security, military and Civilian Federal employees).

In 1974 it jumped to 150 billion.

Govt. Response was to shift Federal employees to Section 104 stock plan retirements. I was given the option of grandfathering in (now theres an irony for you) to the traditional defined- benefit pension, which I took and retired as soon as I could.

There may be full employment but most jobs don’t pay well enough anymore to matter. Why bust your ass stocking shelves, flipping burgers or working a checkout counter for what you get paid these days? Nobody needs full time office help. An army of temp workers handles that. Part time work in America today means someone needs three jobs to barely keep their head above water. It’s no wonder why 100+ million Americans refuse to even work one hour per week!

I sincerely hope Trump cuts off these benefits for anybody too lazy to get off their ass and take a job. What ever happened to dignity and pride in this country? Where we live, I see people who have a hard time walking, and are still working full time.

Sadly, a lot of people seem to think that certain jobs are “beneath them” — but no honest job is deserving of such ridicule. I can’t understand how otherwise able-bodied people who carry that attitude ironically believe it is more dignified to sit at home and live on the dole.

All honest work is honorable and those who bust their tails to earn a living deserve our utmost respect, regardless of how menial the job.

Rising net worth is fine, but it is mainly based on paper wealth. Meanwhile the middle class and lower middle class future is based on stagnant wages (or for many, declining wages). Earning power in the form of wages is the working-man’s greatest financial asset because unlike the wealthy they don’t have lots of financial assets that pass off passive income. When financial assets go up and wages go down the working man takes it in the shorts.

I think I have an easy fix for the pension crisis. Going forward, we just assume an 18% return on all pension funds — which is actually a conservative estimate given the 22% return of the S&P last year. Do you think I can get a job in pension finance?

You hit on something here, Len: “Probably has never occurred to the regulator that one reason for buying bitcoin is to get away from the regulators” (Franklin Sanders). And the central banks, etc. etc.

That’s really the main reason I’m rooting for cryptocurrencies to succeed. Making a few extra bucks is nice, but ending up with a currency that can’t be inflated to death? Priceless.

And yes, as I said before, I support PMs too. It’s just that crypto provides another option for the modern age. How would you like to be able to carry around large amounts of wealth with you (even to other countries), weightless and undetectable, backed by mathematics? You can’t do that with gold.

Really? Your engineering knowledge and experience are weightless and undetectable too. Do you consider that worthless? Your knowledge of passwords to your online bank accounts are weightless and undetectable. For that matter, so is your knowledge of the combination to your safe. Is all that knowledge worthless?

I get why you don’t want to *invest* in cryptos — it is very risky indeed, and even I wouldn’t recommend putting large percentages of your wealth into it. But as a fellow engineer and libertarian, I’m surprised you’re not at least fascinated by the concept, how they work, and what they could mean for our economy if widely adopted. A lot of ingenious ideas went into creating these; they aren’t just your run-of-the-mill digital ledger kept by a bank.

Anyway, I’m enjoying the blog and have learned a lot from you! Cheers!

Yes, I am fascinated by blockchain technology and see countless uses for it — just not as currency. In the event of a fiat failure, I don’t think there will be many farmers willing to trade me a dozen eggs for a long digital address — but I know they will always accept a silver quarter.

Disclaimer

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